Secretary Steven Mnuchin “will engage with the
International Monetary Fund to eliminate the unfair
competitive advantage created by China’s latest actions,” the
department said in an Aug. 5 statement. It’s hard to imag-
ine that the IMF will go along.
Trump is right that China has behaved badly on trade—for
example, by shielding domestic companies from competi-
tion while forcing U.S. and other foreign companies to sur-
render their intellectual property as the price of admission.
He’s also correct that previous U.S. presidents, Democrats
and Republicans alike, haven’t pried many concessions out
of the Chinese. The problem is that Trump’s slapdash, go-it-
alone strategy with regard to China has made it harder, not
easier, to accomplish a solid trade deal.
At this point in the deepening conflict, Chinese President
Xi Jinping can’t make big concessions to Trump, because
he’d be perceived as knuckling under to a foreign aggres-
sor. And Trump can’t bring other nations’ influence to bear,
because he’s chosen to engage China directly rather than
through the World Trade Organization. “It was a tremen-
dous mistake on the part of the Trump administration to
declare a trade war with China rather than take legitimate
complaints to the WTO,” says Anne Krueger, a former World
Bank chief economist who’s now a senior research profes-
sor at Johns Hopkins University.
In April, Robert Staiger of Dartmouth College and Aaditya
Mattoo of the World Bank released a working paper that they
said was “at once more charitable and less forgiving” than
mainstream assessments of recent U.S. trade actions. On the
charitable side, they wrote that there’s a logic to the U.S.
behavior: a switch from “rules-based” to “power-based” bar-
gaining. On the less forgiving side, they argued that the new
style will ultimately harm the U.S. by undermining other
countries’ commitment to rules-based bargaining. “The
result could be a period of China Hegemony,” they wrote.
The most important number in the financial world for
the next few weeks will be the dollar-yuan exchange rate.
On Aug. 6 the People’s Bank of China took a step back from
confrontation. It set its daily fixing for the yuan at under
7 to the dollar (the fewer yuan it takes to buy a dollar, the
stronger the Chinese currency is). It also announced plans
to sell yuan-denominated bonds in Hong Kong, which would
soak up yuan held outside the country and make it harder
for traders to borrow the currency to short it—i.e., bet on
further declines.
Nevertheless, traders are bracing for the possibility that
the Chinese central bank could resume making way for a
weaker yuan, which would help Chinese companies com-
pete in global markets. PBOC Governor Yi Gang indicated
as much in a Bloomberg News interview in early June when
asked if there was a red line for the yuan. “I don’t think
along this mathematical scale, any number is more import-
ant than other numbers,” he said. He also said “a little flex-
ibility” in the yuan was good for the economy.
Trump is right to worry about a weaker yuan. Eventhough it shields American consumers from higher prices, it
makes American goods more expensive in China, hurting U.S.
exporters. For China, a weak yuan can be a strong weapon.
Trump might have been happier if China, rather than letting
its currency fall, had simply cut prices, destroying profitabil-
ity. But that was never a realistic scenario.
While the trade war is turning out badly for almost all
American exporters, it’s especially bad for farmers because
China has halted purchases of U.S. farm goods in retaliation
for Trump’s announcement of 10% tariffs on $300 billion
worth of Chinese imports starting Sept. 1. Roger Johnson,
president of the National Farmers Union, the second-largest
general farm group, says Trump’s “strategy of constant esca-
lation and antagonism” has “just made things worse.”
Given how badly trade talks with the U.S. have gone, the
Chinese have little to lose by letting the yuan slide, says Tom
Orlik, chief economist for Bloomberg Economics. “It’s reason-
able to assume that China’s decision-makers place a low prob-
ability on the chances of a win-win trade deal with the U.S.
That means the political cost of a weaker yuan is reduced.
Trump can rail against currency manipulation; China won’t
pay much attention,” Orlik wrote on Aug. 5.
The tightrope Xi and Yi walk is that allowing too little
depreciation would hurt China’s competitiveness, while mar-
ket expectations of a too-big depreciation could trigger an
all-out currency crisis, with Chinese and foreign investors
desperately evading controls to get money out of the coun-
try before it lost even more value. China had to spend almost
$1 trillion buying yuan to defend it against a serious bout of
capital flight in 2015.
That China is suffering from the trade conflict with the U.S.
appears to please Trump. “Thousands of companies are leav-
ing,” he crowed in a July 15 tweet. But what’s bad for China isn’t
necessarily good for the U.S. In a trade war, everybody loses.
By ramping up trade conflict with China, Trump is leading
the U.S. and the world into a place that he only dimly under-
stands in pursuit of goals that he has trouble articulating. <BW>
�With Shawn Donnan, Tian Chen, and Mike Dorning10
◼ REMARKS Bloomberg Businessweek August 12, 2019*ONSHORE TRADING. DATA: COMPILED BY BLOOMBERGA Cheaper Chinese Currency
Price of one U.S. dollar in yuan*Politically sensitive level8/6/18 8/5/7.1 06.6.May 10
U.S. raises
tariffs to 25%
on $200b of
Chinese importsAug. 1
Trump vows
10% tariffs
on $300b
in goods